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Bitcoin Trading Technology In Question As Currency Dives After Glitch

A software glitch, enabling Bitcoin traders to effectively defraud exchanges, has prompted a severe war of words – between the currency organisation and a Japanese trading venue that questioned whether the core messaging technology is fit for purpose.

Yesterday, the price of Bitcoin, the innovative yet secretive virtual currency reportedly used by some traders for illicit activity, dived by 16 per cent after exchange Mt Gox said there was a “bug” in the Bitcoin software.

The Bitcoin Foundation has rejected the comments, insisting that Mt Gox experienced its own technical problems and was not ready for a well-known messaging risk.

The issue affects transactions from a Mt Gox account to an external Bitcoin address, and not currency withdrawals. It allows someone to use the Bitcoin network to alter transaction details, making it appear that withdrawals to Bitcoin wallets have not occurred and enabling the currency to be resent – potentially allowing someone to make a withdrawal twice for only one charge.

Mt Gox said in a statement: “The problem we have identified is not limited to Mt Gox, and affects all transactions where Bitcoins are being sent to a third party.” It has suspended all withdrawals “until this technical issue has been resolved”.

The latest problem may – to some onlookers – demonstrate the risks of running cutting edge, highly adapted systems on a vast financial scale. It has even prompted an unexpected admission from high profile members of the Bitcoin community that the core technology in use is immature.

Bitcoin Wallpaper (2560×1600) (Photo credit: PerfectHue)

Mt Gox: The Defect Has Been ‘Largely Ignored’

In a scathing comment over Bitcoin’s software coding, Mt Gox said the problem has been “largely ignored” by coders. This was the case even though the issue is “known to at least a part of the Bitcoin core developers” and is frequently discussed on BitcoinTalk forums.

The problem can “easily” be taken advantage of by a party altering a transaction quickly, by direct connection to different mining pools or through simple mining, Mt Gox claimed. The exchange is calling for changes to transaction tracking processes, and insists on better messaging standardization.

Bitcoin: Problem Exchanges Should Know Better

The claims have prompted a swift and angry rebuttal from Bitcoin. Gavin Andresen, chief scientist at the Bitcoin Foundation, said: “Bitcoin is not at fault”.

Instead, Mt Gox was in part to blame, because of its customized software and inflexible platform, Andresen said. He described “an unfortunate interaction between Mt Gox’s implementation of their highly customized wallet software, their customer support procedures, and their unpreparedness for transaction malleability, a technical detail that allows changes to the way the transactions are identified”.

All exchanges need to “responsibly prepare for this possibility and include in their software a way to validate transaction IDs”, he said.

Bitcoin is working on its own problems, including tackling the transaction malleability, he noted, adding that this was “something that cannot be corrected overnight”.

It is understood that large parts of the Bitcoin community, including Mt Gox, are in dialog with the Foundation over how to tackle the issues. But some commenters on Bitcoin forums yesterday blamed Mt Gox, calling for the resignation of its founder Mark Karpeles, who is a board member of the Bitcoin Foundation.

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thanks for the link. Everyone who reads this article should read that link to get the whole truth. They should also be told that Mt Gox has a long history of problems including delays in the withdrawal of funds. The real problem is Mt Gox – not Bitcoin. BTW – just reporting the price plunge on Mt Gox isn’t fair – many exchanges didn’t fall as much and were back up to around $700 USD, but that’s not sensational enough to make it into the article.

Thanks for your message and great points. There has been a lot of conversation in Bitcoin forums about Mt Gox’s issues. I’ve included in the article most of the reaction from the Bitcoin Foundation and that some commenters have called for Mt Gox founder (and Bitcoin Foundation board member) Mark Karpeles to resign. The price was quoted from currency site xe.com (http://www.xe.com/currencycharts/?from=XBT&to=USD ) as there was no Mt Gox price for Bitcoin – it stopped trading. Thanks again for highlighting Mt Gox’s issues.

Whenever you see a hit piece on alternatives to the Federal Reserve ask yourself one question. “Has this ever been done with Federal Reserve based currency?” When people use alternative currencies for drugs or prostitutes or if they bounce a check intentionally, claiming they have more than they do, just remember the people committing all manner of fraud with Fed notes. As we speak some college kid is making an ATM deposit with an empty envelope hoping to use his increased balance for beer money.

I might have a breakdown and need professional help if I find out that alternatives to federal reserve notes are not flawless perfection immune to all the same scams people try with the Benjamins.

Thank you for this fascinating link Erik. At the time of my writing, it appeared a more equal balance of one side blaming the other. Since then, there has been much more extensive commentary on the web (including forums) of Mt Gox’s code and how it has presented itself in this situation. It will be interesting to see if they address these issues, and I am watching the situation as always. Thanks again.

You know what this is like? It’s like saying that since web developers don’t always build software properly, that there is a fundamental flaw in the dollar, because credit cards get stolen. Doesn’t that sound absolutely absurd? I mean, there’s a lot of documentary proof that credit card fraud online is a pretty big deal, and yet… no talk about how flawed the dollar is. If I were fair minded (I’m not) I would ask you to cover that kind of news the same way.

I’ve actually done quite a bit of coding on Bitcoind and the variants now. The reason why Mount Gox and some of the other exchanges are built the way they are is because they’re trying to get around the problem of transaction time. Even when Bitcoin has higher volume than it’s had in years, it can still take 30 minutes to process a transaction with the correct number of confirmations to know that the money has been deposited correctly.

This is an issue we’ve known about for years. It’s not a flaw in Bitcoin. It’s a flaw in the code that someone wrote to handle the exchange. It’s widely understood that this is not a best practice, or in any way sanctioned behavior by the community. When you knowingly breach best practices, just like you may or may not do when dealing with credit cards, it is you who are to blame. Not the medium of exchange.

Then again, to follow that logic, you might also say that the healthcare system in the US is broken because the Obamacare website was written in third world squallier, but I digress.

It sounds really sensational to say that there’s a flaw in Bitcoind, but there isn’t. Just poor, underpaid, asian developers, who may or may not have any formal training.

M Samuel, thanks for your interesting points about trading and the code. The article is intended to show there is a trading technology problem somewhere between the two parties, and to show the opinions expressed by the two sides. I have heard from you and several other sources, including on here, about potential Mt Gox coding problems and will look into this. Thanks again for highlighting this issue and for your comments.